Educational Articles

From the Survey: Ulta Salon

Joel Schwed
| November 24, 2012

Ulta Salon (ULTA) has gained significant attention from both retail and momentum-focused investors over the past few years. The specialty beauty products retailer has been uniquely positioned to be a primary beneficiary of the evolving market fundamentals in the beauty space, and this has translated into strong results. Shares of ULTA have been one of the best performers in the retail sector, and the entire stock market, over the past couple of years. The stock took off like a rocket in the initial recovery from a $4 low in March of 2009, and has remained on an upward trend, recently exceeding $100 before pulling back. Ulta’s strength can be attributed to its hybrid store model, which provides the best features of competing specialty, department, and drug stores all under one roof. The incredibly broad assortment encompasses a selection of over 20,000 prestige and mass beauty products, along with salon services and products. This specialized beauty store model has continued to gain traction in recent years, and the consumer shift to these channels from traditional department stores and pharmacies, appears to mirror what has happened in many other retail segments over the years.

Ulta has consistently posted high double-digit sales and earnings growth since 2008 (it went public in October of 2007). In fiscal 2011 the top line climbed 22%, while share net improved by a whopping 64%, to $1.90. The sales increase was fueled by hearty store expansion, along with a solid 11% same-store sales gain. Notably, this represented the second consecutive year that Ulta posted an 11% comp sales increase. Moreover, the company is on track for another strong performance in fiscal 2012 (ends February 2, 2013), with guidance calling for an 8% comp sales gain (likely 20%-22% reported sales growth) and a 36%-37% increase in share net.

Despite the recent aggressive store expansion, Ulta remains a relatively early-cycle growth story. Indeed, the retailer added 138 locations from 2009-2011, representing a 44% increase in its store base, with average annual square footage growth of 14%. Yet, management recently raised its target for domestic store-base potential to 1,200 locations from the previous 1,000. This represents a substantial expansion opportunity from the 449 stores at the start of fiscal 2012. Notably, the pace of store growth has accelerated in 2012, with the retailer on track to add 100 locations (compared to the 61 additions in 2011), representing square footage growth of approximately 22%. Too, there remains potential for an eventual expansion into international markets.

In addition to strong traffic, sales trends, and store-base expansion, Ulta is poised to benefit from an increased mix of prestige brands. Prestige products represent the highest growth and best performing segment at Ulta, and expansion of the prestige brand portfolio should provide a boost to results. The company recently secured an agreement with Clinique for an expanded in-store boutique rollout. Previously, the Clinique boutiques had been in trial mode across 13 stores, but will now extend to an additional 35 locations. This follows the recently announced expansion of Lancome boutiques to 79 stores. Ulta is likely to continue adding top-tier prestige brand offerings over the next few years, which should provide an additional avenue for growth.

The company’s attractive merchandise assortment and shopping experience has played a large role in its success, but its strength in marketing has been a primary catalyst in driving store traffic higher. Ulta’s multi-channel marketing strategy has been very effective. The company has been able to leverage its 10 million active loyalty customers, through direct marketing efforts. The loyalty program, which is in the process of being converted to a points-based format from certificate rewards, has helped actively engage this large group of customers. Meanwhile, a combination of numerous general marketing campaigns, and unique tailored vendor programs, specials, and gifts have helped raise awareness among target consumers. Ulta has also expanded its digital marketing efforts on multiple fronts, with its e-commerce site serving a dual purpose as a marketing extension.

The outlook remains very bright for Ulta. Indeed, the beauty products retailer has good visibility for continued strong long-term growth. The combination of 15%-20% annual square-footage expansion, (at least) modest comp sales gains, and leverage should yield 20%-plus earnings growth over the next few years. Moreover, there are a number of specific catalysts to support results in the coming years, including a large pipeline of new prestige brands, branching out into additional categories/segments, increased consumer awareness, and leveraging the sizable loyalty program. Ulta is one of the few attractive expansion stories in the retail sector and should appeal to investors with a momentum or high-growth focus.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.